Question

In an income-retirement choice diagram, indicate the effect on an individual’s indifference cures and/or budget constraints, and subsequent retirement decisions, of each of the following:
a) Retirement of one's spouse
b) Illness of one's spouse
c) Improvements to the health of the elderly
d) Permanent displacement from a high-wage job in the steel industry to a low-wage job in the service sector
e) Improvements in the leisure industry such that retirement is now relatively more attractive

Answer 1

(A) If one spouse's retired from the work their income constraint would fall to A'B' from AB. IC curve falls from from IC1 to IC2 and the consumption of both the good falls as income falls when one spouse falls.

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(B) When someone spouse falls ill, his/her budget constraint falls initially to A'B' from AB and the IC curve falls and when there health condition improves, Budget constraint shift rightward again to AB and IC curve shifts again to IC1 from IC2.

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(C) When there is improvement in elder, it will shift the budget constraint to its right and IC curve shifts from IC1 to IC2

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(D) Whne an individual shift from high wage job to low wage job their budget constraint falls to A'B; from AB and IC curve falls from IC1 to IC2.

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(E) When there is improvement in leisure industry which makes their future safe. This will not shift their budget constraint downward as even in future the consumption will not decline, IC curve may shift from one place to another on the budget constraint.

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